In my recent survey of the top stories in 2015 in the world of D&O, I noted that one of last year’s most important developments was the signal that several of the judges on the Delaware Court of Chancery sent in a series of rulings that they would not longer routinely approve the kind of “disclosure-only settlement” that frequently resolves merger objection lawsuits. According to Liz Hoffman’s January 11, 2016 Wall Street Journal article focused on Delaware Vice Chancellor J. Travis Laster and entitled “The Judge Who Shoots Down Merger Lawsuits” (here), after Laster’s October 2015 decision rejecting the proposed settlement in the H-P/Aruba Networks merger objection lawsuit, there were dramatically fewer merger objection lawsuits filed in Delaware, and in fact some previously filed lawsuits are being withdrawn.
Long-time readers are of course aware that in recent years, we had gotten close to the point that just about every merger transaction resulted in at least one lawsuit in which a shareholder filed an objection to the proposed transaction. Although some of these cases did result in substantial awards or settlements, most of the cases were resolved through a so-called “disclosure only” settlement, in which the defendant company agreed to make additional disclosures relating to the transaction and to pay the plaintiff’s attorneys’ fees, in exchange for a comprehensive release. The Journal article quotes Cornerstone Research as saying that only 8% of merger objection lawsuits resulted in a payment of cash.
According to the Journal article, since Laster’s October 2015 ruling in the Aruba Networks case, there has been a dramatic decline in the percentage of merger transactions that result in the filing of a merger objection lawsuit in Delaware’s courts. The article found that during 2015’s first three quarters, 78% of all merger transactions over $100 million resulted in the filing at least one merger objection lawsuit in the Delaware Court of Chancery. However, in the fourth quarter of 2015, most of which followed Laster’s rejection of the settlement in the Aruba Networks case, only 34% of the merger transactions announced resulted in the filing of a merger objection lawsuit in Delaware. In addition, the article also cites several other cases that were previously filed that the plaintiffs’ lawyers have voluntarily withdrawn.
The Journal article a plaintiffs’ lawyer based in Delaware as saying that “the heyday of the ‘file a case, make $500,000’ is clearly over.”
The article makes the point that given the hostile environment in Delaware’s courts to the kinds of settlements that in the past have resolved many merger objection cases, the plaintiffs may seek to file their cases somewhere other than Delaware.
However, the plaintiffs’ ability to pursue these kinds of cases in other jurisdictions’ courts may be constrained as a result of another recent Delaware legal trend. That is, as the result of recent Delaware case law and the Delaware legislature’s recent statutory enactment recognizing the validity of forum selection by-laws, many Delaware companies have adopted corporate bylaws designating Delaware as the indicated forum for corporate and shareholder disputes. For companies that have adopted these kinds of forum selection bylaws, the plaintiffs may not have the option of trying to file a merger objection lawsuit in the court of another jurisdiction. As Doug Greene and Claire Loebs Davis of the Lane Powell law firm note in their January 8, 2016 summary on Law 360 of the top five securities litigation issues to watch in 2016 (here, subscription required), this could cause the plaintiffs’ lawyers to focus their attention on companies that are domiciled outside of Delaware or that have not adopted forum selection by laws.
In addition, as Doug and Claire also note in their article, the lack of the availability of a disclosure-only settlement option is a potential problem for defendants in merger objection cases that are pending or that are filed in the future. The authors note that “If disclosure-only settlements are no longer allowed, defendants will no longer have the option of escaping these cases easily and cheaply. This means that those cases that are filed will doubtless require more extensive litigation and result in more significant settlements and judgments.”
Indeed to avoid this outcome, some companies may choose not to enforce their forum selection bylaw and allow cases filed in other jurisdictions to continue, so that the parties have a vehicle with which to resolve the case. However, it should be noted that the attractiveness and availability of some forums may be limited; as I noted in my Top 10 survey, judges on New York’s court’s have also expressed concern about disclosure only settlements in merger objection lawsuits.